Wednesday, November 10, 2010

If gold is finished with its pullback, it will soon confirm important new bullish targets at 1431.6 and 1481.0.  Yesterday's forty-two-dollar decline in the gold futures from an all-time high has created a pattern with striking symmetry between the pullback and last week's "kA" segment.  If the "C" point at 1382.3 holds and the futures move back up, they will confirm this new pattern and the aforementioned targets, as pictured in the attached graphic.  The odds of this happening will be diminished if gold trades down a few dollars to 1392.3 and does not revisit the current session high of 1402.9.  This would confirm a smaller, bearish pattern which was initiated by the drop yesterday and would suggest a move down to 1381.9, a midpoint pivot, and to 1360.8 if the midpoint gives way.  This midpoint would be a risky trade, as it is just below the "B" point made by yesterday's low, but the sibling "D" target of 1360.8 can be bought with an order a few ticks higher and a stop at 1359.9.  Pivoteers should recalculate the targets if 1402.9 is surpassed, thus moving the "C" point higher, and a decline follows.  (Posted by Doug McLagan) _______ UPDATE (9:45 a.m. ET):  The bullish pattern has been confirmed, and the bearish pattern has been activated with a higher "C" point of 1410.0.  Buyable pivots are now at 1389.0 and 1367.9, so long as 1410.0 holds.

I've flagged a midpoint in support in December Silver, since price action at or near this Hidden Pivot could give us an indication of the strength of bullion's correction. The location of this support also makes it opportune for bottom-fishing with a very tight stop-loss.

We hold a long-term position of 800 shares with an adjusted cost basis of 13.07 against eight December 30-35 call spreads shorted for 3.80 at the recent high.  Let's try to turn the call spread into a butterfly by buying the December 25-30 call spread eight times for 3.60 or better, good till canceled. (It closed yesterday for around 4.00.)  We can't get hurt to the upside since our short spread is akin to a covered write, so we'll take our sweet old time waiting for the long spread to come to us at our price if we have to. _______ UPDATE (Nov 16, 12:16 p.m. ET): Cancel the bid for the call spread, since the spread we've got on should be protection enough.

The fact that the futures fell so hard without having first reached a 30.005 Hidden Pivot rally target suggests that this correction will need at least another day or two to recharge.  In any event, we should have a good indication of trend strength when the downtrend encounters the midpoint support at 26.785 that is shown in the chart.  If it is breached by more than three ticks, I'd infer that the pullback is likely to continue over the near term to at least 25.895, its 'd' sibling.

An old target at 1233.75 is still valid in theory, although it surprised me that DaBoyz could not reach it in the heavily manipulated opening minutes of yesterday's session.  The downturn that ensued instead projects to 1201.50, subject to a possible bounce from the midpoint at 1206.75.  Night owls can try bottom-fishing that last number with a three-tick stop-loss, but it looks too close to a structural support formed by yesterday's 1206.25 low to be considered opportune.  _______ UPDATE (8:14 a.m. ET):  The futures spent the night screwing the pooch, a pursuit they seem likely to continue on Wednesday. Since the upward feint marginally exceeded the point 'C' of the pattern used to project the two correction targets, we'll scrap the trading plans detailed above.

Yesterday's rally was strongly impulsive on the hourly chart, but since it is a flying pig whose behavior we're measuring, we should want to make doubly certain of the bulls' resolve by requiring an  impulse leg on the daily chart.  This will require a thrust exceeding the 78.69 peak shown in the chart. We've referenced the peak before, but two rallies so far have failed the test.  The third time may be the charm, though, and if DXY succeeds, we'll be dollar bulls for the time being, like it or not.

Silver Wheaton shares lost a sixth of their value in mere hours yesterday when they reversed sharply after spiking to a record high. Fortunately, we were a step ahead of the plunge, prepared to short December in-the-money call options if the stock came within ten cents of a promising Hidden Pivot target.  The actual high, at 37.20, was just four cents from the top we’d projected. Going into Tuesday’s session, anyone holding SLW would have been concerned, as we were, that the explosive rally of the last two weeks was too steep to sustain. The stock had risen by nearly 30% in just the last week alone, and it began the day yesterday on a take-no-prisoners, $2 gap, peaking at 37.20.  As it happened, that was just four cents from the Hidden Pivot rally target we’d disseminated to subscribers the night before.  Here is our advice, exactly as it went out to them late Monday night: “We hold a long-term position of 800 shares with an adjusted cost basis of 13.07 and a theoretical profit of $17,600.  One can never be certain exactly where a parabolic rally will crest, but let’s use a Hidden Pivot resistance at 37.16 as a possible target.” The trading advisory went on to provide a detailed strategy for protecting our gains if the stock’s ballistic surge terminated at or near our number. The idea was to leg on a “butterfly” option spread at prices that would leave us with no risk if SLW eventually went much higher lower, but which would yield profits of as much as $500 per spread if the stock dropped back to around $30 and stayed there for a few weeks.  Here’s how we laid it out for subscribers: [Determining precisely where the stock is most likely to top] will give